If you are a manufacturing company in Arizona that sells the majority of your products outside of the state and are anticipating making additional capital investment in the state to create new jobs, you may be eligible to receive an allocation of the Arizona Qualified Facility Tax Credit. Before we go into how the application process works, let us cover the key attributes and how the credit is determined:
Basically, to be eligible for the tax credits, you must:
- Make a capital investment of at least $250,000 to establish or expand a facility that devotes at least 80% of the property and payroll to qualified manufacturing, manufacturing-related research and development or headquarters for a manufacturer.
- Create net new full-time employment positions for the project, of which at least 51% are paid at least 125% of the state’s annual median production wage if located in an urban area or 100% of if located in a rural area. Currently, this threshold is $43,680 for an urban area and $34,944 for a rural area.
- Offer to pay at least 65% of the health insurance premiums for all net new full-time employment positions.
- Sell at least 65% of your manufactured product outside of the state of Arizona.
If eligible, the tax credits are determined based upon the lesser of:
- 10% of the qualifying capital investment or
- $20,000 per net new full-time employment position created at the facility or
- $30 million per taxpayer per year
The Arizona Commerce Authority (ACA) is authorized to issue up to $70 million in tax credits each calendar year. If you are anticipating meeting the eligibility requirements, you will apply for pre-approval with the ACA to receive an allocation of $70 million tax credit pot that can be authorized for that year. This just allocates the anticipated credit that you will receive after receiving post-approval from the ACA at the end of the construction period and related hiring of new employees that meet the requirements. Therefore, it could be years before you receive the post-approval and can start taking the tax credits, which is taken equally over a five-year period. The post-approval needs to be accompanied by a managed review. A managed review is performed by an Arizona-based CPA firm and is the equivalent of an agreed-upon procedures engagement, where procedures are performed over the eligibility requirements and to support the final amount of the credit that is issued via the post-approval.
Even if you were not aware of this credit and did not apply for pre-approval prior to commencing construction or new hiring, you can still apply for pre-approval for an in-process project or a recently completed project. However, the completion of the new facility of expansion of an existing facility cannot be longer than 36 months before applying for pre-approval.
Also good news for the program came out in 2020 in that the Arizona statutes were amended to extend the sunset date for receiving pre-approval. Now, pre-approval of the income tax credits can be made through the end of 2030. Therefore, even if you have postponed certain capital investment expansion projects and the related hiring of additional employees due to the COVID-19 pandemic, you still have plenty of time to pick this back up and apply for pre-approval when your plans start to come back together.
Questions about state and federal tax credits? Contact your Henry+Horne professional today!
Jonathan Poppel, CPA